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GLOBAL PRIVATE EQUITY REPORT 2020 About Bain & Company’S Private Equity Business

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GLOBAL PRIVATE EQUITY REPORT 2020 About Bain & Company’S Private Equity Business GLOBAL PRIVATE EQUITY REPORT 2020 About Bain & Company’s Private Equity business Bain & Company is the leading consulting partner to the private equity (PE) industry and its stake- holders. PE consulting at Bain has grown eightfold over the past 15 years and now represents about one-quarter of the firm’s global business. We maintain a global network of more than 1,000 experienced professionals serving PE clients. Our practice is more than triple the size of the next largest consulting company serving PE firms. Bain’s work with PE firms spans fund types, including buyout, infrastructure, real estate and debt. We also work with hedge funds, as well as many of the most prominent institutional investors, including sovereign wealth funds, pension funds, endowments and family investment offices. We support our clients across a broad range of objectives: Deal generation. We work alongside investors to develop the right investment thesis and enhance deal flow by profiling industries, screening targets and devising a plan to approach targets. Due diligence. We help support better deal decisions by performing integrated due diligence, assessing revenue-growth and cost-reduction opportunities to determine a target’s full potential, and providing a post-acquisition agenda. Immediate post-acquisition. After an acquisition, we support the pursuit of rapid returns by developing strategic blueprints for acquired companies, leading workshops that align management with strategic priorities and directing focused initiatives. Ongoing value addition. During the ownership phase, we help increase the value of portfolio com- panies by supporting revenue-enhancement and cost-reduction initiatives and refreshing companies’ value-creation plans. Exit. We help ensure that investors maximize returns by preparing for exit, identifying the optimal exit strategy, readying the selling documents and prequalifying buyers. Firm strategy and operations. We combine our expertise with insights drawn from our exclusive access to deal-level returns and operating metrics in CEPRES, the leading digital platform for private capital investment analytics. We help PE firms develop distinctive ways to achieve continued excellence by devising differentiated strategies, maximizing investment capabilities, developing sector specialization and intelligence, enhancing fund-raising, improving organizational design and decision making, and enlisting top talent. Institutional investor strategy. We help institutional investors develop best-in-class investment pro- grams across asset classes, including private equity, infrastructure and real estate. Topics we address cover asset class allocation, portfolio construction and manager selection, governance and risk man- agement, and organizational design and decision making. We also help institutional investors expand their participation in private equity, including through coinvestment and direct investing opportunities. Bain & Company, Inc. 131 Dartmouth Street Boston, Massachusetts 02116 USA Tel: +1 617 572 2000 www.bain.com Global Private Equity Report 2020 Contents The search for certainty. pg ..1 1. The private equity market in 2019: Strong deal activity despite worsening macro conditions. pg ..3 Investments:.High.prices,.higher.stakes.for.value.creation.. pg ..4 Exits:.A.return.to.shorter.holding.periods . pg ..13 Fund-raising:.Winner.take.all . pg ..18 Returns:.As.multiple.expansion.fades,.new.muscles.required. pg ..24 2. What’s happening now: The strategies shaping 2020 and beyond. pg ..29 Technology:.Bubble.or.opportunity?. pg ..29 Investing.with.impact:.Today’s.ESG.mandate.. pg ..43 The.new.path.to.payoff.in.payments . pg ..54 Harnessing.pricing.power.to.create.lasting.value . pg ..64 How.to.assess.disruption.in.due.diligence . pg ..73 3. Public vs. private returns: Is PE losing its advantage?. pg ..82 i Global Private Equity Report 2020 ii Global Private Equity Report 2020 The search for certainty Dear Colleague: The beat goes on. Despite growing macroeconomic and political uncertainty across global markets, the private equity industry continues to make and sell investments, raise capital and generate relatively strong returns. Yet, the private markets also continue to throw up challenges. Prices set all-time highs in the US and remained near record levels in Europe, raising the bar for investors looking to create value. Holding periods declined as investors attempted to take advantage of higher prices on the sell side and exit before any impending recession. Fund-raising remained healthy, but the market skewed to larger, more experienced investment firms. And, while returns were attractive, they continued to come under pressure as the industry matured and competition intensified. In this, Bain’s 11th annual Global Private Equity Report, we examine the industry’s strengths and challenges, and the evolutionary path that lies ahead. In addition to the critical statistics that charac- terized PE performance in 2019, we take a thorough look at key strategies the best firms are using to gain a competitive edge, and discuss an important milestone in the industry’s relatively short history. The past year marked the first time ever that 10-year returns in the public markets matched those for private equity. To be sure, the US has ridden a tremendous bull market for public and private assets over the past decade, but what does return convergence mean for the future of private equity? And why didn’t the same phenomenon show up in Europe? In Section 3, we join with Harvard Business School professor Josh Lerner, State Street Global Markets and State Street Private Equity Index to weigh the significance of this unique moment in time and its implications for investors and limited partners. In Section 2, please look for our assessment of PE investments in the technology space and how smart investors manage risk. We also double-click into the payments industry to discuss how investors are making money there today vs. a decade ago and examine how firms are using sophisticated pricing strategies to enhance top-line growth. We take an in-depth look at ESG and the topics of sustainability and impact investing. Environmental, social and governance investing has been around for years, but many firms are finding they need to incorporate sustainability much more explicitly into their investment strategy to meet the needs of limited partners—and, indeed, to make more money on their investments. Can they truly do well by doing good? Disruption has been a key theme for several years. Everyone knows it is occurring in more and more industries and at an increasing pace. But how do you use due diligence to gauge the likelihood for disruption in a specific industry? And how do you determine its potential timing and impact? Turn to Section 2 for Bain’s answer. 1 Global Private Equity Report 2020 I have no doubt that 2020 will be another busy and exciting year for the PE industry. Investors will continue to grapple with how to repeatably create alpha in changing conditions, amid more competi- tion. We at Bain look forward to continuing the discussion with our friends across the industry’s ecosystem. Hugh MacArthur Head of Global Private Equity 2 Global Private Equity Report 2020 1. The private equity market in 2019: Strong deal activity despite worsening macro conditions If 2018 was a year of divergence—acceleration in the US, deceleration in the eurozone and China— 2019 saw economies slowing across the board. There is a growing expectation of a global recession in the near future. Beyond the trade wars and uncertainty around Brexit, a number of economic indi- cators are flashing red or yellow. Some 57% of private equity fund general partners (GPs) surveyed by Preqin worldwide think the econ- omy has reached a cyclical peak, while 14% think it has already entered a recession (see Figure 1.1). They are also significantly more worried about geopolitical conditions than they were a year earlier. Overall, these concerns about market stability help explain why their No. 1 source of anxiety (70% of respondents) is overheated asset valuations. Their caution has merit if the past recession, during which about one-quarter of buyout firms stopped raising capital, serves as any indication (see Figure 1.2). For PE firms, however, the question is less about when the next downturn will come than how to respond when it arrives. A growing number of GPs have already taken steps to prepare. Roughly 40% of PE funds have altered their investment strategies, with some assessing recession risks more carefully during due diligence. Figure 1.1:.More.private.equity.general.partners.are.already.preparing.for.a.downturn GPs’ views of the current equity market cycle GPs’ reactions to the cycle Percentage of respondents Percentage of respondents 100% 100% Unsure 19 Unsure 80 80 9 Trough 55 No change 14 Recession 71 60 60 76 40 40 57 Peak 20 20 40 Altering 29 strategies 12 0 Recovery/ 0 2019 2020 expansion 2019 2020 Note: GP responses in the buyout space Source: Preqin investor interviews, November 2018 and December 2019 3 Global Private Equity Report 2020 Figure 1.2:.During.the.last.recession,.about.one-quarter.of.buyout.firms.stopped.raising.capital,. with.the.smallest.firms.hit.the.hardest 850 642 –208 Active buyout firms precrisis Inactive post-crisis Still active post-crisis Average assets 1.3 0.4 1.6 under management per firm ($B) Notes: Average AUM per firm based on cumulative capital raised from 2000 to 2007; includes all buyout firms that were active before the financial crisis (having raised a fund between 1998 and 2007) Source: Preqin Others are building more balanced portfolios to emphasize countercyclicality, and most are either accelerating exits or getting more wary of overpaying. Despite the somber macroeconomic outlook, global PE activity did not slow much in 2019. GPs con- tinued to make deals, find exits and raise even more capital than ever (though through fewer funds), fueled by enthusiasm from limited partners (LPs) (see Figure 1.3). •.•.• Investments: High prices, higher stakes for value creation While buyout deal value lagged 2018, it remained on par with the past five years at $551 billion (see Figure 1.4).
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